Are you looking for underappreciated stocks to buy on the dip?
There aren’t many around these days.
Stocks have been running hot since November of 2022 when they hit bottom in that year’s tech bear market. Since then, tech stocks have rallied to dizzying heights, while stocks in other sectors have risen to a lesser extent. Even in the world of dividend stocks, there are few true bargains to be found.
Still, you can find bargains if you look hard enough. Although most sectors are up over the last few years, some individual names are down — in some cases, unjustifiably. It’s in this pile that you want to start your search. In this article, I will explore one TSX stock that’s down 24% for no good reason that might be a good buy in 2024.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is a Canadian bank stock that has fallen 24% in price since its all-time high set in January of 2022. The stock has a 5% dividend yield.
Why it’s down
There are several reasons why TD Bank has fallen in price.
For one thing, it recently incurred costs related to its failed acquisition of First Horizon, a U.S. bank located in the southeast. The deal was cancelled over a year ago but TD Bank keeps reporting losses related to hedges that were involved in the deal to this day.
For another thing, the bank’s investment in Charles Schwab has not been performing particularly well. That brokerage has been losing clients and the earnings that TD reports from its investment in it have been trending downward.
Third and finally, there’s the matter of risk. TD’s revenues are rising, but it booked a few quarters of negative earnings (EPS) growth because the perceived risk of its loans is on the rise. A lot of Canadians bought houses in 2020. In the next two years, those Canadians’ mortgages will come up for renewal at higher interest rates than they are paying now. A lot of experts think that a sizable percentage of Canadian homeowners will be forced to sell their houses to cope with unaffordable mortgages. If that happens, TD could suffer an increase in defaults.
Why it could rise again
The above paragraphs might sound scary, but there are actually many reasons to be optimistic about TD Bank stock today.
For one thing, many factors mentioned above are non-recurring. The First Horizon deal hedges will expire eventually; once that happens, they will no longer hold back earnings.
Second, mortgages in Canada are investor friendly, having full recourse to the borrower’s assets.
Lastly, TD Bank has a large and growing U.S. retail business. This business makes up around 40% of TD Bank’s earnings and is exposed to different economic conditions than those the Canadian business faces. This segment provides a lot of geographic diversification and a bit of growth to TD Bank.
Foolish takeaway
Although times might look tough for TD Bank, the underlying picture isn’t so bad. TD is profitable, is growing its revenue, and has very good capital ratios. Its stock will probably recover in the years ahead.
